Since last year, the car market has experienced solid recovery and growth, overcoming the hurdles posed by high inflation, supply chain issues, and rising interest rates. So, investors looking for quality car stocks can consider buying CarGurus, Inc. (CARG). However, considering the weak fundamentals of Carvana Co. (CVNA), it could be best avoided.
The global online car-buying market is expected to reach $722 billion by 2030, growing at a CAGR of 12.2%. Online car buying has become popular due to improved price transparency, convenience, and digital payment choices.
These platforms provide a diverse selection of automobiles, easy benchmarking, and cost comparisons, with little paperwork required, and offer home deliveries.
Moreover, according to IMARC Group, the global used car market will reach $ 1.51 trillion by 2028, growing at a 9.1% CAGR. The used car market is growing due to demand from first-time and budget-conscious buyers.
Investors’ interest in car stocks is evident from First Trust NASDAQ Global Auto Index Fund’s (CARZ) 23.3% returns over the past three months.
However, the difficulty of accurately assessing the condition and history of a vehicle without physically inspecting it, as well as the risk of fraudulent sellers or scams, are among the challenges faced by online car market users.
Let us look deeper into the fundamentals of the featured stocks.
Stock to Buy:
CarGurus, Inc. (CARG)
CARG operates an online automotive marketplace connecting buyers and sellers of new and used cars in the United States and internationally. It operates through two segments, U.S. Marketplace, and Digital Wholesale.
On June 26, 2023, CARG announced the launch of the CarGurus ChatGPT plugin to assist shoppers in finding their ideal car match more quickly. By improving the user experience, this innovative solution is expected to draw in more clients, boost sales, and ultimately generate profit for the business.
CARG’s forward non-GAAP PEG multiple of 1.32 is 10.8% lower than the industry average of 1.48.
Its trailing-12-month ROCE of 46.87x is significantly higher than the 3.29x industry average. Its trailing-12-month ROTA of 25.87% is significantly higher than the 1.49% industry average.
During the fiscal first quarter that ended March 31, 2023, CARG’s marketplace revenue increased 2.4% year-over-year to $167.13 million. The company’s net income and EPS came in at $16.13 million and $10, compared to a net loss and loss per share of $62.09 million and $0.53 in the previous year’s quarter, respectively.
Analysts expect CARG’s revenue to increase 13.8% year-over-year to $1.07 billion for the year ending December 2024. Its EPS is expected to grow 17.2% to $1.11 in 2024. It surpassed EPS estimates in three of four trailing quarters. The stock has gained 61.7% over the past nine months to close its last trading session at $22.66.
CARG’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
CARG has an A grade for Quality and a B for Value. Within the Internet industry, it is ranked #10 out of 58 stocks. Click here for the additional POWR Ratings for Growth, Momentum, Stability, and Sentiment for CARG.
Stock to Sell:
Carvana Co. (CVNA)
CVNA operates an e-commerce platform for buying and selling used cars in the United States. Its platform permits customers to research and identify a vehicle, inspect, obtain financing and warranty coverage and purchase it. It also enables them to schedule delivery or pick-up from their desktop or mobile devices.
CVNA’s forward EV/EBITDA multiple of 59.72 is 508.3% higher than the industry average of 9.82.
CVNA’s trailing-12-month gross profit margin of 11.83% is 66.4% lower than the industry average of 35.25%, while its trailing-12-month levered FCF margin of 0.69% is 82% lower than the industry average of 3.82%.
CVNA’s total revenues declined 23.6% year-over-year to $2.97 billion for the second quarter ended June 30, 2023. Also, its total current assets came in at $3.91 billion for the period that ended June 30, 2023, compared to $4.59 billion for the period that ended December 31, 2022. Its total assets came in at $7.85 billion, compared to $8.70 billion for the same period.
Street expects CVNA’s revenue to decrease 18.9% year-over-year to $11.04 billion for the year ending December 2023. Its EPS is expected to come in at negative $3.76 for the same period. CVNA’s shares have lost 4.6% intraday to close the last trading session at $44.11.
CVNA’s has an overall D rating, equating to a Sell in our POWR Ratings system.
It also has a D grade for Stability and Quality. It is ranked #48 in the same industry. To see additional CVNA ratings for Value, Sentiment, Momentum, and Growth, click here.
What To Do Next?
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CARG shares were trading at $22.41 per share on Wednesday afternoon, down $0.25 (-1.10%). Year-to-date, CARG has gained 59.96%, versus a 19.88% rise in the benchmark S&P 500 index during the same period.
About the Author: Rashmi Kumari
Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.
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